How I beat Yale’s David Swensen

It’s not every day that one’s portfolio beats David Swensen, the great money manager of the Yale endowment.

According to the blog Seeking Alpha and MyPlanIQ, that’s what I did over the last year with my humble “Nano” portfolio. How is it possible that I (narrowly) beat Swensen’s portfolio, the product of a man widely considered to be one of the best institutional money managers in the world?

Created in 2006, the Nano is about small expenses, simplification and asset classes that don’t always move in the same direction. There are only five funds in it (see below), and I spread out my money evenly — 20% in each fund. I tried to cover most stocks and bonds with some real estate and Treasury Inflation-Protected Securities (TIPS).

The Nano portfolio was my concerted effort to create a passive, “lazy” portfolio that you would rebalance every year and mostly forget about until you were close to retirement.

While I’d love to continue hoisting my flag, I will warn you that past performance is no guarantee of future return. And I’m no David Swensen, who has an incredible long-term record with Yale. My picks also didn’t make the final cut for MyPlanIQ’s “playoffs” for lazy portfolios. They calculated their returns with their software, which is not open to my scrutiny, so my 0.24 percentage-point besting of Mr. Swensen is no big deal.

Sadly, my bragging rights hit a brick wall when you look at my three year-returns — losing almost 2 percent. But let’s put that in perspective: That’s still not bad considering the S&P 500 Index lost more than 40 percent in 2008. Yet it pales in comparison to Harry Browne’s Permanent portfolio, which gained 7.4 percent during that period.

Browne’s secret it that it performs well when fear rules and stocks are being clobbered; only a quarter of its holdings are in the iShares S&P 500 Index ETF (IVV).

The remainder of Browne’s portfolio is in the SPDR Barclays Capital Long Term Treasury ETF (TLO), money-market funds and the SPDR Gold Trust ETF (GLD). Since gold prices have soared and hit all-time highs in recent years — Browne has traditionally been an ultra-conservative investor — this doesn’t surprise me.

If you absolutely need an ostrich-like “safe not sorry” approach, then stick with Browne. Looking for more growth and have more than a decade to invest before you retire or simply want to take more risk? Then the Nano might be a good fit.

I would be remiss if I didn’t confess that there has been a huge wild card surface since I first crafted the Nano. Like millions of Americans, 2008 changed everything from my career direction to my family portfolio.

Our overall buy-and-hold allocation before that dreadful year was about 70% bonds, 30% income. I’m a believer in long-term growth from corporate earnings around the world.

Then the piano fell from the sky in late 2008, and my wife couldn’t stomach the idea of having all that money in stocks. So we shifted to a 50% stocks, 50% income mix. I would call this a “domestic” rebalancing. Nobody likes to lose money — even if you’re looking at paper losses and don’t plan to retire soon.

I plan to continue to eat my own cooking and would even add two more funds to the Nano portfolio: The Pimco Commodity Real Return Strategy Fund D (PCRDX) for even more diversification and the SPDR Barclays International Treasury Bond Fund (BWX). The core funds include the Vanguard Total Stock Market ETF (VTI); Vanguard Total International (VGTSX); Vanguard REIT (VNQ); iShares Barclays TIPS Bond (TIP) and iShares Barclays Aggregate Bond (AGG).

Echoing my post-2008 chastening, this is a more conservative “son of Nano” portfolio that places more emphasis on income. Place about 14% in each fund. Disclosure: I own most of these funds in one form or another.

No matter what you do, don’t blindly embrace any style of investing before you do a gut check. You really have to make your own decisions as to how much risk you can afford to take.

Still, it’s great to have a sunny year, although it’s always the stormy ones you have plan for to secure your future.